Will Sanofi Overpay For Actelion Innovation Or, Like J&J, Also Walk Away?

Reported M&A talks between Sanofi and Actelion will likely stand or fall on the former's willingness to overpay and the target's demanded price for surrendering its independence.

Johnson & Johnson has walked away and Sanofi has reportedly taken its place in talks for a deal with Actelion Pharmaceuticals Ltd. that, if consummated, could value the Swiss pulmonary arterial hypertension specialist at up to an eye-watering $30bn.

It was less than two months ago that Sanofi's CEO Olivier Brandicourt said the French group would consider a mid-sized bolt-on attempt if the opportunity arose that can bring it value and further aid Sanofi's quest to diversify into promising therapy areas. (Also see "Sanofi CEO Upbeat Despite Medivation M&A Miss, Sarilumab Diss" - Scrip, 31 Oct, 2016.) So observers were not surprised when the Wall Street Journal Dec. 13 said Sanofi is holding strategic talks with Actelion over a possible tie-up.

For the past year Sanofi has said it has the scope to "maximize" the value of existing brands, and the potential to build scale through mid-size bolt-on acquisitions "in the range of €20bn ($21.30bn)." The question is whether Sanofi - which lost out to Pfizer Inc. in the battle for Medivation Inc. - will pay considerably more than that for Actelion and also end up overpaying for innovation. (Also see "Pfizer’s $14bn Medivation Buyout Shows How Far Pharma Will Go In Oncology" - Scrip, 22 Aug, 2016.)

J&J on Dec. 13 confirmed that it has withdrawn from discussions over a potential takeover, which would have boosted its lung disease offering with Actelion's pulmonary arterial hypertension portfolio, but gave no reasons or details of the discussions other than to say it had been unable to reach a deal that would create sufficient value for its shareholders. Actelion in a statement noted the departure of J&J and the arrival of another unidentified suitor but added there was no certainty their discussions would lead to a transaction.

M&A Drama Reflects Demand

The drama surrounding Actelion reflects the ongoing M&A frenzy within the life sciences sector and the continued dearth of profitable R&D innovation.

Swiss-based Actelion, founded in 1997, specializes in the field of pulmonary arterial hypertension (PAH) and is growing revenues at a steady pace. Its reported revenues saw a 4.5% advance in 2015 year-on-year, to CHF2.04bn from CHF1.95bn in 2014 and that advance has quickened in 2016, with reported revenue in the first nine months reaching CHF1.78bn versus the year earlier's CHF1.52bn, an increase of 17%.

Actelion today is trying to diversify its product portfolio away from pulmonary arterial hypertension with Phase III drugs in multiple sclerosis (ponesimod) and Clostridium difficile infection (cadazolid) while remaining a leader in PAH. (Also see "Actelion's Opsumit Shows MERIT In CTEPH" - Scrip, 7 Nov, 2016.) Jean-Paul Clozel, the co-founder and CEO of Actelion, has consistently championed the idea of Actelion staying independent.

Reuters Dec.14 quoted people close to the situation as saying Actelion had told J&J the biotech could attract an offer considerably above the 250 Swiss francs per share level that the US group had offered, reportedly valuing the Swiss target at around $27bn. There were reportedly issues over the deal structure as well.

The Financial Times said Actelion’s CEO Clozel had recently opened up to the possibility of a deal that would let him keep control of the company.

Sanofi Seen Fitting The "M&A Mold"

Bernstein analyst Tim Anderson in a note dated Dec. 14 said Sanofi fit the mold of a company on the prowl for M&A. "It has a lead franchise [patent expiration] issue in Lantus, a thinner pipeline with the exception of dupilumab, and a lesser R&D track record." He said it therefore was not too surprising that Sanofi was reportedly considering acquiring Actelion, and apparently willing to bid more than J&J was.

"If Actelion were to go out at around $30bn … this equates to some 13x sales and 30x EBIT. These are high figures." - Bernstein Analyst Tim Anderson

Recent trends show victory in M&A bidding wars generally means heavily over-paying for targets.

Bernstein's Anderson said that "If Actelion were to go out at around $30bn … this equates to some13x sales and 30x EBIT [earnings before interest and taxes]. These are high figures."

Actelion's pulmonary artery hypertension franchise fits with Sanofi's orphan drug focus. But observers note that that does not necessarily mean big synergies are to be had.

"PAH is not an area where Sanofi has a meaningful research or commercial presence. Therefore, Actelion would bolt onto Sanofi and bolster revenue growth, but it does not necessarily enhance the company's strategic positioning," Anderson said.

Will Sanofi Overpay?

John Rountree at pharma strategy specialists Novasecta agreed. He noted that cost synergies usually provided the justification for high prices paid for acquisitions. "But it's unclear what these might be for Actelion; it is a successful and well-run company already. So the financial case will be hard to make for Sanofi or other bidders that might emerge," Rountree said.

"Sanofi's disappointment with losing out to Pfizer for Medivation will weigh on the minds of decision-makers … it could result in over-paying this time." – Novasecta's John Rountree

Sanofi's recent disappointment with losing out to Pfizer for Medivation will weigh on the minds of decision-makers, "and if they are indeed exploring a transaction with Actelion it could result in over-paying this time," Rountree said.

He noted that Actelion's success had come about partly because it was not part of a big pharma "with all the many layers of corporate governance that go with that. Being part of a big pharma's R&D structure would be tough for Actelion's scientists."

He said the potential gain for Actelion that it would have had from linking up with J&J would have been indirect access to the US capital market, "which has traditionally been more willing to bet on innovation than Europe, but a link with a European big pharma like Sanofi would not achieve this."

"Big pharma have been becoming increasingly desperate for external innovation, and cheap capital encourages them to over-pay for outside innovation - the grass is always greener on the other side. In this context if Actelion is bought outright, it will be at a very high price," Rountree said.

Analysts at Deutsche Bank said the termination of talks with J&J would probably raise concerns over possible unrealistic expectations of Actelion's management and board.

"While we view the likelihood of a deal as still reasonable given that Sanofi is keen to complete M&A and may be able to make the deal double digit EPS accretive, it is unlikely to be able to extract further value from Actelion’s PAH franchise than J&J given limited sales and marketing synergies."

"As such, execution depends on management’s willingness to engage on a reasonable basis and views over the value of Actelion’s pipeline where Sanofi may have more ability to extract value," analysts at Deutsche Bank said in a Dec. 14 reaction note.